FUNDAMENTALS OF FINANCE
A Guide for Helping Professionals
Adam J. McKee
This work is licensed under an Open Educational Resource-Quality Master Source (OER-QMS) License.
The key to building wealth over time is saving money as you make it on a regular basis. In other words, your paycheck is your number one source of wealth building “seed money.” When searching for jobs, it is critical that you do some soul searching and figure out exactly what you want out of your job. Part of that deliberation has to be money. You have certain ideas about “standards of living” that will be hard to shake. You must align your job with your desired standard of living if you want to stay sane. I understand that those of us who chose the helping professions tend to deemphasize money and focus on people as opposed to things.
So many well-meaning Americans have lied to other gullible Americans so long, that we’ve come to internalize the lie and cannot recognize it as such. Here is the inconvenient truth: A university education is seldom worth the cost you’ll have to pay for it. I concede that lie is too strong of a word because it suggests malice and ill will. Are you really lying to your children when you believe the lie?
Let’s examine a side issue before we delve too deeply into the issue of why college is most likely a waste of money for you. There are many virtuous things in the world, and I hope that you dedicate a sizable portion of your energy every day trying to be virtuous and become more virtuous. I believe that we, as a civil society, should not let children go hungry or go without a basic education (K – 12). I don’t think a society can call itself virtuous of old people are left without food, clothing, and shelter when they reach retirement age. I believe veterans that have been hurt in the service of their country should be given the very best medical care.
Most people are with me up to this point. We are willing to provide safety nets to children, senior citizens, and veterans almost without disagreement. I really believe that we should extend basic food, shelter, clothing, healthcare, and education to every citizen of the richest, most powerful country on Earth. I also support the entire country collectively picking up the tab on higher education, at least on a merit basis. We, unfortunately, don’t live in that world yet. (Younger generations tend to care more about the planet and other people than previous generations did; we may get there yet).
Many of the world’s problems arise because of a lack of specificity; we often deal in vague, emotional terms that don’t provide a rational basis for judgment. If a businessperson says that something will be “Huge” or “Great”, don’t believe them without reading the prospectus for the business. Most of us grew up hearing sermons about the value of “a good education.” That leaves a few questions: What is “good”? What is an “education?” The answer is a resounding “it depends.” Education is only valuable if it moves you forward toward your goals and dreams. If it just makes you good trivia player that can’t get a job, then it has failed you.
My advice in these days of extremely (some would say catastrophic) higher education costs is to not worry about getting an “education” or even “a degree.” Your target is a career that you can make a decent living with and stomach every day for 30 or more years. Don’t begin a degree program and not know what “you want to do when you grow up.” If you are still trying to find yourself, then do that working in a factory for minimum wage. That sort of adversity will get your creative juices flowing!
If you are a criminal justice major, you should be pursuing a criminal justice career field that you can identify with precision. “I want to be an FBI agent.” If you are getting a Social Work degree, then you should have a specific career objective in mind: “I want to be a Child Services Worker and keep children safe from abuse and neglect.” Your objective needs to be to obtain the knowledge and skills necessary to get the job you want and excel at the job you get. If you don’t know what you want to do, then don’t spend $10,000 a year to sit around a university campus figuring it out.
You should also consider your lifestyle and your future plans. If you can’t bring yourself to leave your hometown, population 6,354, it is absolute foolishness to get a fine arts or performance arts degree with the intent of making a living. If your goal is to teach high school art classes, then you may have something. You need to seek the advice of education faculty and talk with people who already have the job and that can tell you about the prospects of getting hired. Don’t get a social work degree of you really don’t like people. Don’t get a criminal justice degree of you are afraid to work with criminals every day.
Consider a stair-step path to higher education if at all possible. Take all the free college classes you can in high school, and look into alternatives to classes. Look for programs that lead to certificates that lead to two-year programs that lead to four-year programs. Don’t let anyone ever talk you into choosing a degree program that requires you to get a graduate degree before you can get a job. For example, becoming a veterinarian is a noble and goal and you can make a good living in that role. Just be sure to get the most employable degrees you can get along the way down that decade-long path. You can get a job with an animal science degree and make a living while you pursue advanced degrees.
Don’t think you have to get a certain degree at a certain level unless your career path strictly calls for it. I’ve had several students enroll in a four-year criminal justice degree program over the years only to quit school shortly after turning 21 and getting a job with a local law enforcement agency. My hat is off to local cops; they do a thankless job for very little pay and huge headaches. I’ve served with them and greatly appreciate their sacrifices. I believe police officers should be required to earn a four-year degree, and I think we should pay them for having it just like other ‘helping professionals.’
A cop with a BS in criminal justice should be paid the same as a nurse that has a BS in nursing. Sadly, we do not live in that world. I do, however, think that it is a huge mistake for those wanting to be local law enforcement officers to go to college for three years, amassing $40,000 in student loan debt, quit college, and then take a job making less than $30,000 per year. When it comes to degree programs, the value is about getting career jobs when you’re done, and not drowning in debt for decades to come. When it comes to college, Go Big or Go Home.
Pay Stub Shock
If you are new to the professional world and all of your prior work experience was as a part-time worker with no real benefits you are in for a rude shock when you get your first paycheck from your first “real job.” When I was working on my master’s degree, I took a job doing security on the night shift and picked up extra shifts on the weekends. I was only on the schedule four days a week, even though I did those extra shifts nearly every week. The reason for this was that the company I worked for wanted me to be ‘part-time.’
Many companies like part-time workers better than full-time workers because federal laws, state laws, and industry standards dictate that full-time employees have the right to certain benefits, such as health insurance. It is much, much cheaper for companies to cover a 40 hour per week position with two part-time employees than it is one full-time employee that has the rights to a benefits package. Benefits really do cost employers money; depending on the company and the way things are set up, your employer can spend 25% to 50% of your salary on benefits and taxes that you never see. Human resource professionals (and grant writers) refer to these costs as “fringe benefits.”
That word “benefits” can be very misleading. You can make the argument that each one provides a benefit to the employee. Some are more beneficial than others! The mistake comes in interpreting the word to mean “something given for free.” Your employer will “eat” some of the costs of your benefits package, but you will be responsible for paying a share. A major difference between employers is how much they pay versus how much you pay for your benefits. Ideally, you want to find a job where the company/agency pays all of your fringe benefits. That will rarely be the case. When you get to the interview stage in your job search, be sure to ask for a breakdown of the benefits package and what you can expect your part of those costs to be. You may find that a great job with a great agency isn’t so great because you will be taking home far less than the salary range seems to indicate.
With your part-time job, you weren’t paying for many benefits if any. You made so little money that you didn’t have to pay much to Uncle Sam and your state (if you live in an income tax state). This translates into a situation where you are taking home almost everything you are making. In the professional world where you make a salary and put money into your 401K, you can expect to take home a little more than half of what you make. So if you get a $40,000 per year job, you will not take home the $3,333.00 that your brain says you should. You will actually take home around $1,700.
Things may not be as rosy as you thought they’d be! We’ll dissect all this and show you how to not only live on your salary but, over time, grow into real wealth.
Savings (the secret to getting rich) is a very simple equation. It is your income minus your expenditures (we’ll get a bit more complicated about that in later sections). Obviously, for savings to increase, you have to increase your income or decrease your expenditures. What this book suggests is that you constantly seek to do both. Of course, I want you to do this in a legal, ethical, and balanced way. By balanced, I want you to live your life and spend time with your family. Don’t take three jobs and work 80 hours per week just to make money. Money should enhance your life, not rule it.
Most of us get the bulk of our income from work. Most jobs require you to work 40 hours per week. That doesn’t leave much time for other income-producing tasks! The best ways to increase your income, then, are to get a raise at your current job, get a new job that pays better or get a second job. Consider whether you are underemployed. What I mean by this is that if you have skills, experience, and qualifications beyond what is required for your current job, then maybe you should look for a better one. This is an easy choice for someone with a business degree; if you get a better offer, take it!
But since you are a helping professional, you may not be willing to jump ship quite so easily. You have to ask yourself, “can I help people just as much working another job that pays better?” If the answer is yes, then consider an upgrade. If the answer is no, then begin to consider how you can improve your bottom line at your current job. Are their promotion opportunities? Would extra education, skills, or training help you get that promotion?
In the helping professions, it is usually a mistake to think of your employment as a job. You need to have a career. A career is focused on you and not your employer. It has a plan and a trajectory toward an ultimate goal (I mean one before retirement!) You have to balance the needs of the people you serve against the financial needs that you and your family have, and you have to keep reevaluating this over the course of your career. Many people get a position and don’t ever really think about making a career move. This is a counterproductive strategy. If an agency gives you no chance for upward movement (and the accompanying pay increases) then you should strongly consider moving to an agency that does offer that opportunity.
You must also consider the relationship between your career aspirations and where you live. If you live in small-town America and serve an impoverished community, then you will struggle financially as a byproduct of that conviction. The more people you have and the better off those people are economically, the bigger the tax base and the more likely you are to be well compensated. Some people love their communities and are not willing to leave under any circumstances. That’s great, as long as it is an informed decision.
Don’t let geography limit you until you know what you could be making if you moved to another part of the country. I’m not suggesting that you move all around the country chasing a bigger payday. But you should understand that location has a lot to do with how much money you’ll make and how much of it you’ll get to keep. Several states have high state income taxes, and some states have no income taxes. If you have what it takes to be an Alaskan, the state will actually pay you to live there! As with nearly everything else in this book, my advice is to do your homework and make an informed decision.
When you are thinking about asking for a raise, you have to consider the average salary for your position in your area. This will tell you how you are doing when compared to the local job market. You can’t go to your boss with information about what your counterparts in Los Angeles and New York City are making if you live in a small town in the Midwest. The department of labor maintains statistics that you may find helpful for this purpose. Professional organizations often keep wage information as well.
You should also consider whether you merit a pay raise because of your exemplary job performance. Many companies and public agencies offer merit raises to employees that go beyond the call of duty and outshine their peers. Doing the best job you possibly can help you in many ways; it can lead to merit raises, and it can also put you at the front of the line when it comes time for a promotion. Another approach to warranting a pay raise is taking on extra responsibilities. There is no shame in letting your supervisor know that you are willing to take on extra responsibility for extra pay.
As you may have expected from a book on personal finance written by a college professor, I suggest that you seriously consider higher education and more higher education. When all other things are equal, it pays to earn every credential you can. High school graduates make more than those that dropped out. Those that have some college make more than those that have only graduated high school. Those that have certificates earn more than those that just took a few classes in college that didn’t lead to anything. Those with an Associate’s degree earn more than those with a certificate. Those with a four-year degree earn more still.
The earning power keeps going up with a master’s degree, and the difference is big. It is worthy of note that the relationship tapers off here unless you go on to get a professional degree like becoming a medical doctor, veterinarian, dentist, or a lawyer. Doctoral degree holders tend to make less money than their less educated counterparts with professional degrees. Unless you really, really want to be a college professor for a living, then I don’t suggest getting a Ph.D.
You must consider whether the degree you are seeking will help you with salary concerns in jobs that you are willing to take. If you want to be a police officer in the small town where you grew up, then it may not make sense to get a Master’s degree in criminal justice because your tiny agency will not pay you anymore because of the degree. The benefits of higher education only kick in when you seek out employers that want you to have the degree and are willing to pay for it. If they are just as willing to hire someone with a high school diploma to do your job, then you will not get the advantage.
Passive Income Streams
One of the best ways to make money is to work hard at something, and then have it generate income for a long time to come without your continued attention. These types of opportunities are not available to everyone, but they are great if you can find one. A good example of a passive income stream is writing a book and selling it to a publisher. Every time they sell a copy of your book, you get a little money. It’s a small stream, but it can be constant. Have a property that you don’t use on a regular basis? Consider renting it out. Always seek to create income opportunity where you previously didn’t realize it existed. The internet has opened a world of opportunities, but you have to have an edge to participate in these many forms of extra income. If you are a very good writer and are willing to master the art of SEO writing, there are many opportunities with companies like WritingBunny.
Where You Live Really Matters
Economic theory suggests that regional differences in income should be small because workers would migrate from one region to another if the differences were large. The lower supply in the sending region would increase wages, and the higher supply in the receiving region would lower wages until the wages equalized. Employers might also migrate with the same equalizing effect.
Wage differences may persist if income has to offset inequality in housing costs, taxes, and other cost-of-living differences.
Consider the difference between purchasing a median-priced home in the South ($144,200 in 2011) versus the Northeast ($237,500) with a standard mortgage (30-year fixed, 20 percent down, 5 percent interest). The payment on the median home in the South is $619, while it is $1020 in the Northeast. This sums to $4,800 annually. Per capita taxes also differ. In Tennessee and South Carolina, state and local taxes are around $2,800 per person, while Connecticut and New Jersey governments collect over $5,800 per person. Cost-of-living differences could absorb the regional differences in income for many people.
Some of our expenses are the same for all Americans, no matter where you live. Payroll taxes include the Social Security tax (which does have a maximum amount of income it applies to) and the Medicare tax. Since these taxes are the same no matter where you live, it is state and local taxes that make the difference. While taxes shouldn’t be your only consideration when deciding where to live, knowing how much of your paycheck you’ll get to keep after taxes can help you make a better decision about how salaries in different states compare and what you will get to take home at the end of the pay period.
Final Thoughts on Your Career
The bottom line is that your career is the best vehicle for making you comfortable in life, and ultimately making you rich. If have a mere job that isn’t going anywhere and will never really provide you with enough money to save despite making wise decisions and being frugal, then you cannot achieve the financial goals I’ve set for you in this book. A big difference between a career and a mere job is the trajectory and timeline.
A career should always be moving you forward, making you more money, and moving you a step closer to a comfortable retirement. Many helping professionals limit themselves because they are not willing to move to a more prosperous area or take a more rewarding job. I’m not saying that this is a bad thing. I just want to be sure that you are making those sacrifices knowingly and intelligently and for the greater good, and not because you didn’t know you had other options.